Financing in Africa by China, Japan and South Korea Chris Brown Partner, Head of Financial Investors Group Norton Rose Fulbright LLP June 2015.

Financing in Africa by China, Japan and South KoreaChris BrownPartner, Head of Financial Investors Group Norton Rose Fulbright LLPJune 2015

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WHAT MAKES CHINESE FINANCING IN AFRICA IMPORTANT

• In 2010, Chinese policy banks lent more to African countries than the World Bank

• Chinese money = a much needed source of financing in Africa and one that commercial banks cannot always compete with

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WHAT MAKES CHINESE FINANCING IN AFRICA DIFFERENT

• Four key distinguishing features:

i. Resource nexus; ii. Chinese content;iii. Security and credit

comfort; and iv. Government

involvement

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Parent company guarantee

Holdco

Parent

Offtaker EPC Contractor

Lender

Host country government Project

assets

Projectco

NO RESOURCE NEXUS as income stream from offtake usually:(i) forms part of

the security in favour Lender; and

(ii) critical to bankability as it gives Lender certainty on Projectco’s ability to repay the loan.

Security over shares in Holdco

Security over rights against EPC contractor

NO GOVERNMENT INVOLVEMENT other than grant of permits and/or a concession

Security over Project assets (including account balances, licences and other assets)

Construction services

$

$

Product

Loan $

Security over receivables

Security over shares in Projectco

TRADITIONAL PROJECT FINANCE SECURITY AND NO CREDIT COMFORT other than parent company guarantee usually

NO MANDATED CHINESE OR OTHER CONTENT in EPC arrangements

TRADITIONAL PROJECT FINANCING

KEY

- Resource nexus - Chinese content - Security and credit comfort - Government involvement

Permitting

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Parent

Holdco

Projectco

Chinese EPC

contractor

Chinese offtaker

Project assets

$

Construction services

Host country government

Chinese lender

Framework agreement

Permitting

SECURITY AND CREDIT

COMFORT

Sovereign guarantee

RESOURCE NEXUS$

Product

CHINESE CONTENT

Payment of loan obligations until Project operational

KEY

- Resource nexus - Chinese content - Security and credit comfort - Government involvement GOVERNMENT

INVOLVEMENT

CHINESE FINANCING

Loan $

Chinese government

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RESOURCE NEXUS

• Between 40% and 60% of every mineral that gets mined anywhere in the world ends up in China

• Strategic interest

• No commodity price hedging

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RESOURCE NEXUS: AN EXAMPLE

China Exim financing of post-war reconstruction in Angola

• USD 2 billion oil-backed loan.

• Margin = 1.5%.

• China = major importer of Angolan crude oil e.g. between 2002 and 2008, Angolan oil exports to China have increased seven-fold.

• Proceeds of oil sales to China offset against amounts owing under the loan. Oil revenues deposited into a China Exim escrow account from which the debt service amounts are directly deducted.

• Off-take arrangement = real “value” extracted for the USD 2 billion Chinese loan.

• No hedging.

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CHINESE CONTENT

• Chinese goods and/or services

• Indirect support = inter-governmental loan

• Direct support = export buyer’s credit

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CHINESE CONTENT: SOME EXAMPLES

China Exim financing of the Kariba power station in Zimbabwe

• USD 319 million inter-governmental loan to Zimbabwe.

• Deeply concessional loan. Interest rate = 2%.

• Contract for the expansion work for the project “awarded” to Sinohydro, a Chinese state-owned hydropower engineering and construction company. Value of contract = USD 319 million.

China Exim financing of telecom infrastructure in Nigeria

• USD 200 million commercial export buyer’s credit.

• Tied to the purchase of a Chinese made satellite.

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SECURITY AND CREDIT COMFORT

• Full project finance style security rarely asked for

• Ranges from no security to limited security usually where there is a strategic interest for China

• Other forms of credit support

• Innovative methods of credit comfort for Chinese policy banks

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SECURITY AND CREDIT COMFORT: AN EXAMPLE

China Exim financing of mining and infrastructure in the DRC

• USD 6.2 billion inter-governmental loan.

• No asset security.

• China Exim got “comfortable” because it:

i. had direct recourse to the DRC government under a sovereign guarantee for the inter-governmental infrastructure loan;

ii. had access to 68% of shares in Sicomines, the DRC mining company being financed (through the Chinese state-owned entities, CREC and Sinyhydro that were joint shareholders in Sicomines); and

iii. would get the non-guaranteed mining loan repaid ahead of the guaranteed inter-governmental infrastructure loan.

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GOVERNMENT INVOLVEMENT

• From the Chinese government = to serve strategic interests of China

• From government of the host country = to reduce risk profile for Chinese policy banks

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GOVERNMENT INVOLVEMENT: SOME EXAMPLES

China Exim financing of infrastructure in Togo

• Framework agreement with the government of Togo.

China Exim financing of the Bui Dam in Ghana

• Framework agreement with the government of Ghana.

• Until the Bui Dam is operational, the government of Ghana will make interest payments to China Exim which will be reimbursed by the project company once the Bui Dam is operational.

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1. Parent company guarantee for full contract price2. Bank guarantee/bond for 15% Advance Payment

Construction services

Security

Promissory notes

Upfront 15% Advance Payment

Monthly drawdowns to settle invoices

Loan $

Assignment of Promissory Notes and Projectco security

No recourse except in

limite

d circumstances

Projectco

Chinese LenderSinosure

Sinosure cover

Chinese EPC contractor

NEW STRUCTURES

KEY

- Resource nexus - Chinese content - Security and credit comfort - Government involvement

Chinese government

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KEY TERMS: LOAN TERMS

• Loan amount includes contract price (less Advance Payment), capitalised interest, lender and Sinosure fees and expenses

• Terms agreed upfront with Project Company

• No amendments to loan / terms with Project Company consent

• Limited Events of Default

• No acceleration or enforcement for Contractor defaults

• Only Project Company defaults are insolvency, validity of mining licence; failure to pay under promissory notes

• Promissory notes and Project Company security assigned by Contractor to Lenders

• Project Company security

• Only enforceable for agreed Project Company risks (as above)

• Limited in value up to the lower of (i) issued promissory notes and (2) independent valuer’s assessment of value of works completed to date

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KEY TERMS: PROMISSORY NOTES & SECURITY

Promissory notes

• Invoices to be validated by Project Company to confirm the relevant works have been completed

• Issued for 85% of each validated invoice – remaining 15% set off against advance payment

• Payable on 24-36 months, with interest to match the agreed rate of the loan

• Contain limited defaults (non-payment, invalidity of mining licence) which will cross-default the loan

• Will allow set-off of amounts owing by the Contractor to the Project Company

Project Company Security

• Share security and mining assets

• Only enforceable for agreed Project Company risks

• Limited in value up to the lower of (i) issued promissory notes and (2) independent valuer’s assessment of value of works completed to date

• Released if Project Company terminates EPC Contract for Contractor default, following payment of outstanding liabilities

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JAPANESE FINANCING IN AFRICA

• Japan = most active Asian project finance sponsor in Africa in the last year. Particular focus so far on Nigeria and Morocco.

• Strategic partnerships between Japanese commercial banks and local commercial banks e.g. Sumitomo Mitsui Banking Corporation has formed a partnership with Absa Bank focussed on the development of Mozambique’s natural resources, infrastructure and water security.

Japanese consortium financing of Safi Energy coal power project in Morocco

• USD 2.1 billion commercial loan to Moroccan JV partly owned by Mitsui & Co. Backed by Nippon Export and Investment Insurance.

• Syndicate of lenders = JBIC, Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corporation and Mizuho Bank.

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SOUTH KOREAN FINANCING IN AFRICA

• South Korea follows the Chinese model = loan afforded through its development bank to an African government on the condition that the loan is used to finance infrastructure projects that are managed by South Korean companies.

• KEXIM is the main lender.

KEXIM financing of Ghanaian power transmission lines in Ghana

• USD 60 million concessional loan.

• Conditional on two South Korean companies, GS Engineering & Construction and Samsung, undertaking the project construction.

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